The Supreme Court ruled that the Commission on Audit (COA) overstepped its authority by declaring a Deed of Exchange between Felix Gochan & Sons Realty Corporation and the City Government of Cebu void. While COA has broad powers to audit government revenue and expenditures, determining the validity of contracts falls under the jurisdiction of the courts. This decision clarifies the limits of COA’s powers, affirming that it cannot encroach on judicial functions by deciding on the validity of contracts.

Cebu Land Dispute: Can COA Decide Contract Validity in a Property Swap?

This case revolves around a proposed land swap between Felix Gochan & Sons Realty Corporation (Gochan & Sons) and the City Government of Cebu (Cebu City). Gochan & Sons owned two properties: one in Barangay Guadalupe occupied by Banawa Elementary School, and another in Lorega, designated as a Socialized Housing Site. Cebu City owned a property in Salinas Drive, Lahug. In 2005, the Sangguniang Panlungsod approved a land swap where Gochan & Sons would transfer its Banawa and Lorega properties to Cebu City in exchange for the Lahug property. A Deed of Exchange was executed, but the Commission on Audit (COA) later questioned the deal, leading to a legal battle that reached the Supreme Court.

The central issue was whether the COA had the authority to declare the Deed of Exchange void ab initio. The COA argued that the exchange violated Republic Act (R.A.) No. 7279, the “Urban Development and Housing Act of 1992,” because Cebu City’s Lahug property was more valuable than Gochan & Sons’ properties. The COA believed that the exchange required its approval and, without it, the contract was invalid, relying on a previous case, Danville Maritime, Inc. v. Commission on Audit. This highlights the COA’s interpretation of its role in overseeing government transactions to prevent disadvantageous deals.

The Supreme Court disagreed with the COA’s stance. The Court emphasized that the determination of a contract’s validity is a judicial question, falling squarely within the jurisdiction of the courts. A judicial question involves interpreting the law and determining the legal rights of the parties involved in a controversy. The Court stated that COA’s role is primarily audit-related and does not extend to making judicial determinations about contractual validity.

The Supreme Court highlighted that the COA’s reliance on Danville was misplaced, as the cited portion was merely a stipulation in a Memorandum of Agreement (MOA) and not a ruling by the Court. Crucially, the Deed of Exchange in this case did not stipulate that COA approval was essential for its validity. Moreover, there is no law that requires prior COA approval for a Deed of Exchange to be valid. Building on this principle, the Court clarified the boundaries of the COA’s authority, ensuring it does not encroach upon the judicial power vested in the courts.

The Court also addressed the COA’s concern that the land swap violated R.A. No. 7279. While the law defines land swapping and aims to ensure that Local Government Units (LGUs) receive land of equal or higher value, it does not explicitly prohibit deals where a private individual offers land of lesser value, provided they compensate the difference. Section 10 of R.A. No. 7279 indicates that the modes of land acquisition are not exclusive. In light of this, the Supreme Court stated:

SEC. 10. Modes of Land Acquisition. – The modes of acquiring lands for purposes of this Act shall include, among others, community mortgage, land swapping, land assembly or consolidation, land banking, donation to the government, joint-venture agreement, negotiated purchase, and expropriation: Provided, however, That expropriation shall be resorted to only when other modes of acquisition have been exhausted.

The Court interpreted this to mean that LGUs can explore other land acquisition methods, as long as they benefit the public and do not prejudice the government. Thus, the Court approved a modified land swap, requiring Gochan & Sons to pay the City Government of Cebu P20,137,000.00 to compensate for the difference in property values. This approach contrasts with a strict interpretation that would have nullified the entire agreement, promoting a more flexible and pragmatic solution.

This decision underscores the importance of adhering to the boundaries of different governmental bodies. While the COA plays a crucial role in ensuring accountability and preventing the misuse of public funds, its authority is not unlimited. The Supreme Court’s ruling protects the integrity of judicial functions and reinforces the principle that contractual disputes are best resolved through the courts. Moreover, the decision provides clarity on how land swaps can be structured under R.A. No. 7279, encouraging creative solutions that serve the public interest while protecting the government’s financial interests.

FAQs

What was the key issue in this case?	The central issue was whether the Commission on Audit (COA) had the authority to declare a Deed of Exchange between a private corporation and the City Government of Cebu void. The COA argued that it did, while the corporation contended that such a determination was a judicial function.
What did the Supreme Court rule?	The Supreme Court ruled that the COA exceeded its authority by declaring the Deed of Exchange void, as determining the validity of contracts is a judicial function. The Court clarified that COA’s powers are primarily audit-related and do not extend to making judicial determinations about contractual validity.
What is a Deed of Exchange?	A Deed of Exchange is a contract where two parties agree to swap properties, each transferring ownership of their property to the other. In this case, it involved a private corporation exchanging land with a local government unit.
What is Republic Act No. 7279?	Republic Act No. 7279, also known as the “Urban Development and Housing Act of 1992,” governs land acquisition and socialized housing in urban areas. It provides various modes of land acquisition, including land swapping, to address housing needs.
What does R.A. No. 7279 say about land swapping?	R.A. No. 7279 defines land swapping as exchanging land for another piece of land of equal value. The Supreme Court clarified that it doesn’t prohibit deals where a private individual offers land of lesser value, as long as they compensate for the difference.
Did the Supreme Court approve the land swap in this case?	Yes, the Supreme Court approved the Deed of Exchange between Felix Gochan & Sons and the City Government of Cebu. However, the approval was subject to the condition that Felix Gochan & Sons pay the City Government of Cebu P20,137,000.00 to compensate for the difference in property values.
What was the basis for the Supreme Court’s decision?	The Supreme Court based its decision on the principle that determining the validity of contracts is a judicial function, not an audit function. The Court also considered the intent of R.A. No. 7279, which allows for flexibility in land acquisition methods.
What is the implication of this ruling for government contracts?	The ruling clarifies the limits of COA’s authority, ensuring that it does not encroach on judicial functions. This protects the integrity of judicial processes and promotes a more balanced approach to government oversight.

In conclusion, the Supreme Court’s decision in this case reaffirms the separation of powers between governmental bodies and clarifies the scope of the COA’s authority in relation to contractual agreements. By setting aside the COA’s resolutions and approving the Deed of Exchange with a condition of payment, the Court promotes flexibility and pragmatism in land acquisition while safeguarding the government’s financial interests. This ruling offers a valuable precedent for future cases involving similar issues.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Felix Gochan & Sons Realty Corporation v. Commission on Audit, G.R. No. 223228, April 10, 2019